The stock market can be a fascinating place, with buyers and sellers connecting from all around the globe to bet on the future prospects of companies. Amongst all the interconnected movements and market forces at play, how do seasoned investors identify stocks worth buying? And what does the research process look like before determining what a stock’s true value is?

Knowing how to analyze a company’s stock can give you an upper hand in the markets and ensure you’re buying the right stocks–at the right time. Even if you hear talks of a looming recession, the great news is that you can make money in the markets no matter the economic conditions. You just need to have the right tools and information at your fingertips to make informed investment decisions. 

So, continue reading below as we walk you through why it’s important to analyze a company’s stock before buying, and what methods to take in order to analyze a stock for yourself. 

What Does it Mean to Analyze a Company Stock Before Buying?

So–what does it mean to analyze stocks? Being an active participant in the stock market and operating with a legitimate strategy will require you to do more than just buy the stocks of companies you enjoy or that you’ve heard talked about in the media.

In order to make smart investment decisions that will reward your portfolio with gains, you need to take a deeper look at stocks to get a glimpse of the internal workings of their financials, the competition in the space, and their future outlook.

Therefore, analyzing a company requires you to investigate the fundamental and technical factors impacting shares, and consider both the quantitative and qualitative aspects that may influence how they are valued and what their future prospects are. Essentially, analyzing a stock before buying means that you’re conducting adequate research to determine whether it’s worth buying at the current price–or if you should wait for a more attractive entry point.

Is it Hard to Learn How to Analyze a Stock Before Investing?

The truth is that learning how to analyze a stock before investing is often challenging. Analyzing a stock by hand can be time-consuming, overwhelming, and complex once you start to dig into quarterly earnings reports. That’s because so many things affect the price of a stock.

Because of this–finding the right tools that can do the analysis for you is such a great investment. Not only can you eliminate the guesswork and the human error that comes with analyzing shares manually, but you can also take the emotion out of the investment decisions and rely on an accurate stock forecasting tool instead. 

How to Analyze a Stock Before Buying: Step by Step Guide

Knowing how to analyze a stock before buying is something that all investors should learn. There are a few different ways to analyze the value of shares and determine whether to buy, sell or hold, so we’ll list some of the main methods below–including how to fundamentally analyze a stock. So, let’s take a look at how to analyze a company stock for yourself. 

Begin With High-Level Research

When you begin to analyze a stock, you’ll want to start by gathering the necessary information and documents you’ll need in order to do thorough research. So, pull the company’s financials from the past few quarters, which you can find in Form 10-Q that the SEC requires publicly traded companies to submit. Having this information on hand will be very useful when we get more into how to fundamentally analyze a stock below. 

In addition to gathering the financials, you may want to take a look at some of the notable analyst comments and recommendations about the given stock in order to put your research into some context. This doesn’t mean you’ll necessarily agree with the analysts after completing your own research. But, it can help to give you some perspective before you begin your analysis and provide you with some clues as to what you should look out for. 

Focus on the Financials

Now we can discuss how to fundamentally analyze a stock. So once you’ve gathered all the necessary financials, you’re ready to dive deep into the reports and do some fundamental analysis of the stock. 

Just like the indicators utilized in swing trading, investors have identified some common metrics to look for when doing a fundamental analysis on shares. These metrics help them to determine whether the stock is set for growth, is currently undervalued or overvalued, in addition to a number of other takeaways.

Some of these commonly analyzed metrics include: 

  • EPS: The earnings per share demonstrates the total amount of earnings that a company generates, divided by the number of shares trading on the market. So, this is the portion of the earnings that you would be guaranteed as an owner of the company’s shares. In addition, this gives you a good metric to compare against other companies, though there are some limitations. It doesn’t necessarily show you how the company is using its capital, or the profitability that they achieved, but you can follow the EPS trends in recent quarters to give you a good gauge of where the company may be headed. 
  • P/E Ratio: Using an earnings multiple, like the price-to-earnings ratio, can show you the discounted present value of a company’s future earnings. Above all, this metric shows you what investors are willing to pay for $1 of the company’s current earnings. So, analyzing the P/E ratio of a stock can give you an indication of whether the shares are over or undervalued at the current market price.
  • PEG Ratio: Closely related to the P/E ratio is the PEG ratio–which stands for price-to-earnings-to-growth. This metric is viewed as a more accurate measure of a company’s value than the P/E ratio alone, as it takes into account the earnings growth rate that the company expects during a certain time frame. Typically, a lower PEG signifies an undervalued stock, which may mean it’s a good opportunity to buy. A higher PEG will indicate the opposite. 
  • Dividend Yield: Lastly, the dividend yield that a stock offers is another crucial metric for investors. While not all company shares offer dividends, the ones that do offer an added benefit for shareholders. This is a pretty simple calculation that doesn’t require individual estimations or forecasting. So to find the dividend yield, you divide the quarterly dividend by the current price to see the percentage of the stock’s value that they give back to shareholders. In general, the higher the dividend yield, the better.

Consider Qualitative Factors

After completing the fundamental analysis of a company’s shares, you will likely have a good read on whether it’s worth investing in or not. However, you still may want to consider some of the technical factors affecting the stock’s performance, In addition, other ongoing trends in the industry and the overall market sentiment may impact your final decision as well.

For example, analyze the business model of the company, and really get to know how they make money. If it’s unclear to you, it’s too complex, or they’re operating in a dying industry with no plans to pivot, you may end up more bearish on the shares than what the fundamentals might suggest.
On a similar note, try to identify elements of the business that give it a competitive edge over its peers. This may be a patent, a partnership, or a distribution method–but seeking this out may bolster your investment thesis about a company’s stock.

Qualitative factors like these may not overshadow the conclusions you made from doing fundamental analysis, but they are still important aspects that you can’t overlook when learning how to analyze a company stock. 

How to Make Stock Analysis a Task of the Past With VectorVest

What if you could just analyze the stock in question using software that tells you everything you need to know – none of the technical jargon, just the important info? That’s what VectorVest does. Our free stock analyzer will show you why more and more investors are ditching the old way and trusting us with their strategy. No one–not even professional traders–has time to conduct fundamental and technical analysis each time they want to buy or sell shares, or even just analyze your current holdings. 

From telling investors when to sell when swing trading to providing clear buy and sell recommendations for a given stock, VectorVest does it all. Our platform eliminates the guessing game for investors while providing accurate data to help you make money in any market conditions. Or, see our analysis in action on some of the most searched stocks on the market here. Get the #1 stock analysis tool today and start analyzing stocks on autopilot. Spend less time in front of your screen, more time cashing in!

Final Thoughts on How to Analyze a Stock Before Investing

Learning how to analyze a stock is an important skill for investors, though complex and time-intensive. But–making money in the markets doesn’t have to be complicated. With the right tools and research, you’re well on your way to building up a solid portfolio that makes you money in any market conditions.

With VectorVest, investors have the upper hand in the markets and can access clear and up-to-date recommendations for any stock at any time. Don’t spend your valuable time pouring over 10-Qs and analyzing analyst opinions–get quick and straightforward recommendations from VectorVest about what stocks to buy and when. Try VectorVest today and easily discover which stocks are undervalued and worth the investment.